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Five Facts about the UIP Premium

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  • Ṣebnem Kalemli-Özcan
  • Liliana Varela

Abstract

We uncovered 5 novel facts on Uncovered Interest Parity (UIP) deviations for 22 emerging markets (EM). The average UIP premium—or the excess currency return—is: 1) always positive with large time-varying volatility; 2) correlates negatively with capital flows; 3) co-moves with global risk sentiments. 4) Using realized exchange rate changes or expected changes from survey data delivers the same result. 5) Policy uncertainty is the underlying primitive, capturing the high-frequency-variation in the UIP deviations, since country and currency risk are both captured by the interest rate differentials. Only fact (3) holds for advanced countries’ excess currency returns.

Suggested Citation

  • Ṣebnem Kalemli-Özcan & Liliana Varela, 2021. "Five Facts about the UIP Premium," NBER Working Papers 28923, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:28923
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    Cited by:

    1. Gutierrez, Bryan & Ivashina, Victoria & Salomao, Juliana, 2023. "Why is dollar debt Cheaper? Evidence from Peru," Journal of Financial Economics, Elsevier, vol. 148(3), pages 245-272.
    2. Javier Bianchi & Guido Lorenzoni, 2021. "The Prudential Use of Capital Controls and Foreign Currency Reserves," NBER Working Papers 29476, National Bureau of Economic Research, Inc.
    3. Javier Bianchi & Saki Bigio & Charles Engel, 2021. "Scrambling for Dollars: International Liquidity, Banks and Exchange Rates," Working Papers 786, Federal Reserve Bank of Minneapolis.
    4. Miguel Acosta-Henao & Andrés Fernández & Patricia Gomez-Gonzalez & Sebnem Kalemli-Ozcan, 2022. "The COVID-19 Shock and Firm Financing: Government or Market? Or Both?," Working Papers Central Bank of Chile 967, Central Bank of Chile.
    5. Ekaterina Pirozhkova & Jeffrey Rakgalakane & Luchelle Soobyah Rudi Steinbach, 2023. "EnhancingtheQuarterlyProjectionModel," Working Papers 11044, South African Reserve Bank.
    6. Matthieu Bussière & Menzie Chinn & Laurent Ferrara & Jonas Heipertz, 2022. "The New Fama Puzzle," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(3), pages 451-486, September.
    7. Jeanne, Olivier, 2022. "Rounding the corners of the trilemma: A simple framework," Journal of International Money and Finance, Elsevier, vol. 122(C).
    8. Boermans, Martijn A. & Burger, John D., 2023. "Fickle emerging market flows, stable euros, and the dollar risk factor," Journal of International Economics, Elsevier, vol. 142(C).
    9. Ekaterina Pirozhkova & Jeffrey Rakgalakane & Luchelle Soobyah & Rudi Steinbach, 2023. "Enhancing the Quarterly Projection Model," Working Papers 11048, South African Reserve Bank.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General

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